Neoliberalism and its mainstream macroeconomic theory Monetarism are not bad theories like these old-fashioned Socialist and the other Left-wingers condemn at all! These theories teach very important socioeconomic lessons for all the individuals to live as long as the monetary economy where individuals use fiat-money for their intermediary of exchange in their daily life thrives to exist.
Those who are against Neoliberalism tend to blame these theories as the severe survivalist Capitalist political theories leading the majority individuals to deprivation. However, it is the same nonsense as blaming Marxism and the other socialist theories for the disastrous mistakes of the United Soviet Socialist Republic (USSR). Both Marxism and Neoliberalism contain the non-negligible elements to study the political affairs and the human history.
- The monetary policy channel instead of the fiscal policy
Focusing on Monetarism as he major base macroeconomic policy of Neoliberalism, the key element of this theory is analysing the nature of the fiat-money flowing into economy as the intermediary of exchange. In the long run, the money value is neutral to the other substances distributed in the world. By contrast, it regards that the change in the money supply volume affects the economic activities and productivity level in the short-medium run.
Monetarism regards highly of the value of the fiat-money supplied by the central bank which should be supported by its credibility and its market demand. Therefore, it is sensitive to adjust the money supply level to the aggregate production level of this economy in order to avoid the value depreciation.
It encourages the private sector based economy functioned by the spontaneous order of individual economic agents voluntarily deciding the aggregate production volume according to their needs and wants on spot. It discourages the excess reliance on the fiscal policy cutting tax and increasing the government expenditure while incurring national debts leaving their responsibility of repayment with the inevitably increasing future taxation and cutting the future government expenditure in the long run. Instead, it tackles with the temporary economic downturn by temporary pumping the extra money supply filling the temporary emerging negative output gap.
- High-Powered Money as the antidote against the deflationary recession
In order to enable the fiat-money to stimulate economy, the velocity power of this money supply which is its value and credibility in both domestic and international market, is required. When individual economic agents appreciate its value and credibility, they find its extra supply as valuable and trustable to use as their intermediary of exchange in both domestic and international market. They may either spend for their exchange or save in their banks using the extra money from their saving account as the extra investment resource for increasing their profit. This is called High-Powered Money theory.
According to Monetarism, the deflation inducing the recession, the negative output gap, is caused by an error of scaling the optimum market aggregate production level or a false information delivered to economic agents. Thus, the deflationary recession is caused by the stuck money circulation which means the money supply level is not balanced with the aggregate productivity level. In this scenario, the money supply as the High-Powered Money can be increased to directly inject it to economy to equalise it to match with the aggregate productivity level.
- Killing inflation is more important!
On the other hand, Monetarism regards of Stagflation (the output stagnation + the price inflation) as the excess money supply unmatching with the aggregate productivity level. Then, the decreasing output caused by Stagflation is considered as the long-term phenomenon which should be solved by cutting the cots including wages of the production even if it means to discourage their business activity level at least for a short run.
The reason to sacrifice the output to suppress the inflation is to maintain the money value as useful to be implemented as the High-Powered Money. Even to protect the employment by maintaining the wage distribution, the real value of their wage/income is consequently reduced when the price inflation, the money value depreciation, is perpetuated. Monetarism is actually a humanitarian political theory against depreciating their income/wage level to avoid consequently treating these employees as the quasi-slave labour.
Monetarism antagonises the perpetuated inflation even for diverting the negative output gap is bad for economy overall. Even though the extra money supply is injected into the real good and service market to push the output level up, the value depreciation negatively affects the capital market.
Most of the capital asset value is based on the base money so that the money value depreciation implies the capital asset value depreciation in the international financial market. Almost all the firms producing goods and services are invested by banks and shareholders through the capital market.
In addition, firms in the good and service market also face the import cost up under Stagflation as the excess money supply perpetuating Stagflation. Because all the regions of this world are interdependent on each other so that the relative value decline of the fiat-money used in one regional economy causes the purchasing power depreciation of this regional economy.
- Monetarist, Consequentialist Ethical Philosophy
Overall, Monetarism supports the gradual and natural economic recovery encouraged by private individuals and firms under the stable market economy propped up by the balanced money supply adjusted to the aggregate productivity level. This ethical policy is what Neoliberalism shares with and aspires to achieve so that Monetarism is the core macroeconomic policy of Neoliberalism.
Monetarism and Neoliberalism are often regarded with a bitter cold attitude towards those suffering from economic downturns by these antagonists. However, it is really a prejudice to accuse them as such because these theories take account of the majority individual citizens such as their about preventing their real income depreciation caused by the monetary value depreciation.
Monetarism and Neoliberalism may be categorised into the Consequentialist ethical philosophy which attempts to maximise the overall net benefits by maximising the sum of the gross benefits while minimising the sum of the various cots as a total at the end. Monetarism criticises the big government policy directly caring their citizens by incurring a massive debt and the non-stoppable inflation depreciating their income and the market value of financial assets in the international market. Monetarism counts on the rationality of each individual's free will and the spontaneous order based on these free wills to recover their economy with the minimum assistance by the small government.
It does not mean that both Monetarism and Neoliberalism neglect the public support with government assistances. They simply suggest the minimum required assistances. Furthermore, the High-Powered Money of Monetarism maintains the real value of the assistances provided by government and the procurement power of this government gathering the resources for their provision. This is why the European countries implementing Social Democratic socioeconomic policies adopt Monetarism for their core macroeconomic policy.
- Monetarism in Europe
The weight on each different macroeconomic theory which Neoliberalists adopt to follow depends on each Neoliberalist. Some of them mildly adopt Keynesian theory meanwhile the devote Neoliberalists base their thoughts and plans purely on Monetarism. As a matter of fact, the European Central Bank (ECB) and the central banks of Scandinavian countries, whose countries are famous for their Social Democratic socioeconomic policy, follow the monetarist macroeconomic policies especially for their tight prudent money supply policy. This proves that Monetarism is worth referring to not only the economic Right-wing but also the relatively more centralist counterparts.
Social Democracy is actually the friendly version of Liberal Democracy (Capitalism) (※) and not technically Socialism. Therefore, it makes sense that these Social Democratic European countries are happy to install Monetarism as the principle macroeconomic theory of handling their market economy. Their socially minded intervention is not stimulated by the proactive positive macroeconomic intervention by a central government expenditure or the extravagant money supply from a liberal central bank which Keynesian economic theory often uses.
※ Liberal Democracy and Liberalism by means of this comparison are treated as the synonym of Capitalism, the market economy, because Neoliberalism is mentioned to explain in this essay. Liberal Democracy is therefore the synonym of Neoliberalism here. Then, Social Democracy is the derivation of Neoliberalism rather than Socialism.
The level of tax and expenditure rarely changes flexibly unlike those adopting Keynesian theory as their core principle macroeconomic policy. Their costs for the socially minded public intervention of these European countries are covered by the tax revenue from the progressive taxation levied on individuals and firms their steadily growing market economy. These European countries especially since 1997 (The European Monetary Union conducted by the ECB was introduced then) have been actually reluctant to artificially stimulate their economy.
It is because their macroeconomic tradition, especially of Germanic and Nordic, puts high priority on prudence over expansion. Their Social Democracy sustains the diverse income distribution allowing the slow but steady human capital development. Therefore, Monetarism matches with their prudent attitude towards economy to slowly but steadily raising their economy backed up by the human capital development requiring the steady continuous public investment in the long run.
- Conclusion: Monetarism and Neoliberalism are good!
In conclusion, having re-evaluated Monetarism and its ethics basing Neoliberalism, it is actually an ethically good functional socioeconomic political philosophy. Their characteristic is simply different and unique from the other political economic theories. Their quality depends on how, where, and when it is implemented in real.
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